Few would disagree that a strong regulator is required for a strong superannuation system. But APRA’s myopic focus on cost to members means its $70,000 Christmas party is unlikely to help its reputation.
Good investing requires real sacrifices, according to Oaktree’s Howard Marks, but you can’t expect to be compensated just for making them.
Emerging markets tipped to weather Trump storm
Lazard Asset Management is optimistic that emerging markets can weather the storm posed by the new Trump presidency and that the fundamental strength of their economies should outweigh the policy uncertainties of the new US Government. Hopefully.
A new paper by the Lazard Asset Management emerging markets (EM) team, based in New York, which covers both equities and debt, says that investors need to climb over a “wall of worry” this year.
The paper says: “Despite clear improvements in emerging markets economic data, not all investors are convinced that the structural bear market in emerging markets is over. Adding to the cautionary mood are expected headwinds from US inflation and rising US rates under a pro-growth Trump administration.
“Exogenous factors have strongly influenced emerging markets assets for several years now, and are expected to pose significant negative tail risks in the months ahead…
“However, we believe it is equally important to note that fundamentals could continue to strengthen this year. For equities in particular, there are signs that we could be in the early stages of an earnings recovery.”
On EM equities, the paper says the manager believes emerging markets should be able to withstand a measured and gradual increase in US interest rates as it servers to confirm the improving US economy.
There are some issues, of course. A strengthening US dollar poses problems for Ems but if it occurs gradually they should be able to cope with the effect. Similarly, a sharp and substantial increase in US rates – which is not what’s expected – would likely attract investment flows away from emerging markets.
James Donald, a managing director and head of the emerging markets (EM) group at Lazard Asset Management, says it is too early to tell which policies the Trump administration will actually implement.
“A trade war with China and Mexico, for example, poses serious drawbacks for US companies and consumers, leading us to believe that the Trump team may take a more pragmatic approach,” he says.
“The rise of populism in the developed markets is also a risk to emerging markets. If the political status quo is overturned in Europe, delays in decision-making could result in a growth scare. If parties such as the Five Star Movement in Italy and Marine Le Pen’s National Front in France win upcoming elections, this could legitimize agendas to leave the euro zone.”
EM companies have historically had a tendency to misallocate capital and this has broadly limited the premium that investors are willing to pay for future earnings, Donald observes.
“Therefore, evidence that emerging markets companies are once again prioritizing profitability, where some have operated only as instruments of the state, could go a long way in altering attitudes. Companies such as Brazil’s energy giant Petrobras have been transformed in the past year. Its business is now focused on maximizing cash flow to pay down debt instead of funding expansion.
“Bank stocks, particularly lenders with exposure to non-performing loans, could be among the biggest beneficiaries of margin improvements as this could boost their asset quality. If the financial health of their debtors improves (notably among industrials companies, which were hard hit when the commodity bubble burst), we believe this should translate to a decline in non-performing loans.”
With respect to EM debt, the paper says the new Trump administration possibly poses the greatest threat for investors. That threat, notwithstanding an uptick in growth in the US due to fiscal stimulus, has to do with commodities. China’s immediate prospects also pose a potential threat for debt investors.
The paper says: “Within emerging markets debt, we believe there will be significant
 winners and losers in 2017. Our research suggests that the winners
 will likely be external debt spreads (spreads are expected to contract 
by 10-30bps), high yield US dollar debt (expected to post
returns of 6-12 per cent), and high-beta commodity-focused emerging
 markets currencies versus the euro (we expect these currency pairs
to generate low-double-digit returns).
“Losers in a US-driven growth 
recovery are likely to be any asset that is positively correlated to risk-
free securities, which includes almost all investment-grade US dollar
 debt…
“Further losses are likely to be felt in other developed world
 currencies versus the US dollar (including the euro, yen, and RMB as a broad US dollar rally (5-7 per cent) should persist into 2017. As a result, we believe any emerging markets currency pair that is linked to the euro, yen, or renminbi is likely to be pressured. These currencies include those of most of Eastern Europe and emerging Asia.
“As such, for the first time in years, performance in emerging markets debt will likely not be driven by high-level asset class calls (local debt versus external debt) but rather by positioning in the subsets within local debt and external debt. Put simply, 2017 performance is likely to be as a result of bottom-up country and sector decisions as opposed to top-down macroeconomic forecasts.”
